Essay on Outsourcing: for the International Markets in India!
India is a land of contrasts. On one side there is high level of illiteracy (roughly 40 per cent) and on another side there is a highly qualified workforce that has spread all over the world due to its superior skills Hence it is not surprising that India should be sought after by international companies for outsourcing work.
These can be seen in diverse activities that are labour-intensive. Costs of labour, as mentioned earlier, are low as compared to international standards.
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Outsourcing in India is prevalent at two extreme levels. At the bottom end, there are poorly-paid workers in ‘sweat shops’ who put together goods for the international market. At the opposite end, there is outsourcing in the microelectronic sector, involving large contracts for developing software, etc.
The current trend is for Business Process Outsourcing (BPOs), involving operation of call centres on a wide scale and other forms of outsourcing such as back-office functioning. Legal companies, banks and other loan agencies outsource their office work to these Indian companies. Most of this work comes from the USA though the UK also has a fair share.
The extent of outsourcing can be seen from the large number of call centres operating in various cities. Gurgaon, a city close to Delhi, has a large concentration of call centres, while Hyderabad is among the global centres of information technology for which it is known as ‘Cyberabad’ (Cyber City).
In Mumbai, the suburb of Andhra has a large number of call centres and other BPOs. In Kolkata, the government has demarcated an area for software companies in Sector V of its suburb, Salt Lake. Bangalore is known as ‘India’s Silicon Valley’ given the large concentration of software companies in the city.
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Outsourcing in India started in the software industries over a decade ago. Bangalore was the city where this started. The microelectronic revolution of the 1980s brought about radical changes in production. The sudden improvement in communications led to rapid transfers of capital as well as trade between countries. The change in technology made it possible for countries like India that had a pool of technical personnel to take advantage of the changed scenario.
Table: India IT/BPO Industry Revenues, Software and Related Services, FY 1998-2009:
| USD Bn | FY | FY | FY | FY | FY | FY | FY | FY | FY | FY | FY | FY | CAGR |
| 98 | 99 | 00 | 01 | 02 | 03 | 04 | 05 | 06 | 07 | 08 | 09 | ||
| Exports | 1.8 | 2.7 | 4.0 | 6.2 | 7.6 | 9.5 | 12.9 | 17.7 | 23.6 | 31.2 | 40.4 | 46.3 | 34.3% |
| Domestic | 1.4 | 1.6 | 1.9 | 2.5 | 2.6 | 3.0 | 3.8 | 4.8 | 6.7 | 8.2 | 11.7 | 12.4 | 22% |
| Total | 3.2 | 4.3 | 5.8 | 8.7 | 10.2 | 12.5 | 16.7 | 22.5 | 30.3 | 39.4 | 52.1 | 58.7 | 30.3% |
Several leading MNCs and other international companies took advantage of the microelectronic revolution and decided to shift their activities involving communication and computer technology to countries like India. These countries had trained personnel who could be employed at low wages (compared to wages in developed countries).
This led to the first forms of outsourcing. Holmstrom conducted a study of Bangalore as a techno-city where flexible specialisation was introduced (Holmstrom 1997). A more recent study on Bangalore details the problems of the software industry (Heitzman 2004). It traces the relationship between information technology and social organisation in the city.
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Outsourcing in the software industry is done by large companies in the developed countries. For example, the entire accounting work of a German MNC is done in Bangalore and so is the ticketing for international airline companies. Similarly, the software upgrading of cell phones for US companies is also done in outsourced units.
India has a comparative cost advantage as far as software is concerned. The level of living is lower and around US$ 1000 a month would be a fairly decent salary for a qualified software programmer. Similarly, the call centres have flourished because the operators know English and are available at cheaper rates than their counterparts in the USA and UK.
The operators are paid around US$ 650-700 per month and supervisors/ group leaders earn around US$ 800—1000 per month. In the USA, they would be paid not less than US$ 3000 besides social security benefits. This is why companies in USA, Australia and the English-speaking parts of Europe have chosen India for outsourcing the call centres.
The boom in call centres happened in the late 1990s with the sudden and rapid improvement in communication technology in India. It has provided employment to several thousand youths especially in the cities. A news report (India Today 2002: 36-49) noted that in late 2002 there were 336 centres employing 110,000 people.
The other form of outsourcing is the back office activities. These offices provide back-up services to companies in the developed countries, especially in the USA, providing information on various legal and other matters for the company that has hired them. The costs in this case too are low compared to those in developed countries for the same services. We have described the type of outsourcing that is done at the upper end of the market.
Outsourcing in the developing countries is mainly prevalent in certain industries that involve low technology and low labour costs. Thus in industries such as textiles and garments outsourcing is quite popular. Bangladesh is at present an important area for outsourcing in the garment industry.
In India, outsourcing in garments is not very popular because there is a quota system for export of garments. Our textile industry is involved in export of better-quality fabrics. We have discussed in the section on outsourcing in the domestic market how the power-loom industry has replaced the large textile mills.
In cities such as Surat, in Gujarat, the power-loom industry is engaged in outsourcing for markets abroad. Other industries that engage in outsourcing are the leather industry and the handicrafts industry. In these industries, the labourers have low literacy and are impoverished, the wages being low and working conditions extremely poor.
In most cases, workers are paid at piece rates, i.e., according to the number of items they produce. The rates paid are usually low and the worker has to put in ten to twelve hours of work a day in order to produce enough for getting a minimum wage.